N. Va. Home Sales Down 39% in July; Virginia in Top 5 of U.S. Sales Decline

For Sale!Falls Church should not take its declining residential home value situation personally. The dramatic cooling of the housing market that portends serious budget problems for the City of Falls Church next year is hardly a local phenomenon.

Virginia is among the five states in the entire U.S. with the biggest drop in home sales over the second quarter of a year ago, and in Northern Virginia, including Falls Church and its immediate neighbors, July sales dropped a whopping 39% over a year ago with the average home sale price dropping almost 4%.

Moreover, in the bigger picture, the housing cool down is tied to a deeper national trend that, according to some credible financial experts, threatens to pull the plug on the entire global economy, creating a self-feeding spiraling effect downward.

According to a report this week from the National Association of Realtors, home sales nationally were down seven percent in the April-June quarter this year compared to the same period in 2005, and the biggest drops, ranging from 26.9% to 23.5% were in Arizona, Florida, California, Virginia and Nevada. In a separate survey of price changes, the Realtors reported that 26 metropolitan areas in the U.S. experienced “outright price declines” in that period.

As significant as it is, Virginia’s 23.9% second quarter drop is minor compared to the report by the Northern Virginia Association of Realtors that July sales in the farthest northern section of Virginia were off by 39% over a year ago. Average home prices in Northern Virginia this July were also 3.94% lower than a year ago.

This data supports the argument made in a commentary by no less than Stephen Roach, the chief economist at Morgan Stanley, in Monday’s Financial Times, entitled, “Not Much Fizz Left in the Global Economy.”

According to Roach, the “recent vigor of global economic growth” is about to come to a screeching halt primarily due to one thing: “The world is about to lose significant support from the key driving force on the demand side of the equation – the American consumer.” Analyst Wolfgang Munchau follows on Roach’s essay with a similar tone in the same edition of the London-based Financial Times.

Hidden amidst the words in Roach’s essay are some more fearful forecasts of not only cooling housing prices, but of an inevitable, if potentially very abrupt end to a four-year binge of easy money in the U.S. that lured countless Americans into buying more than they could afford.

What “no one told us” was that this four years of flooding of the U.S. consumer market with excessive liquidity was, according to Roach, due to “emergency anti-deflationary actions of the world’s central banks.”

This unleashed a buying spree in the U.S. that helped drive up housing prices (consumers suddenly had access to lines of credit to afford and thus to shoot up prices, aided by no down payment, adjustable rate mortgages) and reduce the savings rate below zero. In other words, people were readily seduced into not only spending more than they could afford, but more than they had.

For far too many Americans, debt obligations above basic living costs, calculated on a month-to-month basis, are now greater than incomes, requiring them to draw their down savings and increase their debt in order just to survive. And for many, the worst is yet to come.

Now, job growth has slowed to a level 35% below average since early 2004. An emerging downturn in residential construction activity is knocking at least one percent off the growth domestic product (GDP) growth trend of the past three years. In the context of this, inflation-adjusted spending growth fell to 2.5% in the spring this year, a full percentage point below the trend of the entire last decade.

According to Roach, “the delayed impact of higher interest rates is also taking a toll. Even though the Federal Reserve has put its two-year monetary tightening campaign on hold, there is a risk it has already gone too far.”

Thus, “the confluence of higher energy prices, rising debt-servicing burdens and negative personal savings rates reinforces the possibility of a pullback in discretionary U.S. consumption and GDP growth,” he observes, in the financial prognosticator’s predictably understated terms.

The higher interest rates will become the “chicken that comes home to roost” as the slowing of job creation and rising energy prices, as they run through the entire economy, combine with an end to the brief, fixed rate respite provided home buyers with those famously balloon-shaped adjustable rate mortgages.

Seemingly overnight, home ownership will become unaffordable for millions of Americans, and they won’t solve their problems by dumping their properties on the market in hopes of bailing out (much less cashing in).

Languishing “For Sale” signs sitting for months in front of homes (one right in the center of Falls Church, a relatively modestly-priced town home has been sitting there for five months so far) are not a problem for well-to-do long-time homeowners not burdened under the pressures of a ballooning adjustable rate mortgage.

But for all those young families who bought into the binge, the viability of the lives they hoped to construct with in a $700,000 home with a combined income of $150,000 will quickly vanish, as well as may one or more of the jobs in their households.

Morgan Stanley’s Roach calls this a “pull back.” It could more readily be called “chaos.”

For the rest of the world, this means the great American orgy that has snapped up everything anyone wants to export here will also end, and there is no evidence that anyone overseas can do anything about that.

“Overheated” economies, such as China, will be hit by a sudden inability to export and, therefore, on the wider global scale, the impact will be felt everywhere.

China, for example, according to Roach, “has a seriously overheated economy.”

“With real GDP surging at an 11.3% annual rate and industrial output growing at a record 19.5%,” China will have to “introduce tightening initiatives.”

“The failure to do so could see trade protectionism squeezing exports and a deflationary overhang of excess capacity leading to an investment bust,” Roach writes. There would be serious “ripple effects” from this other commodity-producing countries like Australia, Canada, Brazil and Africa, he noted, and “the world’s big oil producers would also feel the repercussions from a Chinese slowdown, as would China’s Asian suppliers, Japan, Korea and Taiwan.”

Domestically, in the U.S. and in Northern Virginia, the data for housing dramatically underscores Roach’s analysis.

The National Association of Realtors’ report on the second quarter of 2006 confirms that “the slowdown in the once-sizzling housing market is spreading, with 28 states and the District of Columbia reporting spring sales declines,” according to an Associated Press report.

Among the states with the biggest decline in sales was Virginia, with a 23.9% percent drop, placing it among the top five with Arizona (down 26.9%), Florida (down 26.7%), California (down 25.3%) and Nevada (down 23.5%).

But those numbers are nothing compared to what the Northern Virginia Association of Realtors, reporting on areas subsuming Fairfax County, the City of Fairfax, Arlington County, Alexandria and the City of Falls Church, had to say about sales for this July compared to July 2005. The number is down 39%, from 2,285 to 1,856.

Average sales prices decreased in July, with an average sale price of $537,731, a net 3.94% decrease from July 2005’s average of $559,790.

Moreover, the decline is even greater outside the immediate Northern Virginia area, in Prince William, Loudoun and the Greater Piedmont counties, with home sales down 44% and average prices down 1.59%.

The number of homes up for sale right now is 147% over a year ago, meaning that many fewer people are buying.